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Tuesday, January 22, 2013

Optimistic Forecast for FinTech Providers

A new
report, being released today by the William
Mills Agency,reveals that spending by financial
institutions is recovering as the economy and industry rebounds. The
tenth annual ‘Bankers as Buyers’ study shares indepth insights and research from more than thirty individuals and organizations regarding what technology, services and solutions banks and credit unions are
expected to invest in 2013.

This report is a compilation of viewpoints from many of the most influential research and fintech support institutions in the country and is available as a free download here.

In this year's report, IDC Financial Insights projected that technology spending is expected to increase to $57
billion, with much of the spending expected to occur in the ‘second tier’ of
financial institutions ($1 billion - $10 billion) as opposed to the largest
banks.

"As
technology continues to be central to customer interactions and an improved
customer experience, we are constantly reminded that technology in not a
banking department, but is everywhere . . . including in the hands of consumers”,
states Scott Mills, president of the Williams Mills Agency. “Demographic and
behavioral changes, combined with changing technology preferences and the need for
improved trust and brand loyalty will force banks and credit unions to evaluate
the role of technology in the delivery of services", adds Mills.

Additional
findings of this year’s ‘Bankers as
Buyers’ report include:

A total of
14,210 financial institutions make up today’s depository landscape, which is
down 3.7 percent from 2011 according to the FDIC and CUNA.

While much
of the focus on payments technology is on mobile, organizations are also
looking at improvements in online payments, ACH, P2P and prepaid cards to
attract customers.

According
to the 2012 KPMG Community Banking Outlook Survey, 47 percent of responding
institutions identified regulatory and legislative pressures as the most
significant barrier to growth over the upcoming year.

Raymond James predicts North American IT spending will continue to grow at a relatively
modest three-year compound annual growth rate of 3.1 percent.

Branch/teller
capture will have a 98 percent expected adoption rate in 2013 and 2014
according to Celent.

Cloud
computing has had a rapid acceptance, with many banks inquiring about
alternative cloud strategies, according to Dan Holt, president of CSI.

Being able
to leverage ‘big data’ will be increasingly important to profitably serving
both retail and small business customers according to Jim Swift, CEO of
Cortera.

Mobile
Remote Deposit Capture (RDC) is being considered by 80 percent of financial
institutions according to Celent.

Spending Outlook

As mentioned above, IDC
Financial Insights expects North American financial institution technology
spending to increase to $57 billion, with the largest financial organizations
seeing slower growth rates than their smaller counterparts. This trend is
expected to continue in 2014 and 2015 as shown below.

This post is recapping some of the spending highlights from the 'Bankers as Buyers' report, including those in the areas of mobile banking, compliance and security and payments. Additional areas of spending covered in the 'Bankers as Buyers' study in significant detail include:

Analytics/Big Data

Small Business

Branch Technology

Cloud Computing

Community Banking

Loyalty Programs

Personal Financial Management (PFM)

Mobile Spending

This year's report emphasizes that, with the
penetration and use of smartphones and tablets continuing to increase, mobile
banking technology is expected to impact all aspects of technology spending in
financial services in the coming years. “Mobile payments are a major driver behind mobile banking
and a potential customer retention and revenue tool for financial
institutions”, states Richard Crone, founder of Crone Consulting, LLC.

Ron Shevlin, senior analyst from Aite Group agrees saying, “Aite Group anticipates
that mobile banking users will triple between 2012 and 2016 in the U.S.” He
continues, “Tablets will become financial management devices, and smartphones
will become financial transaction devices. FIs need to invest accordingly.”

Many others
in the ‘Bankers as Buyers’ study
point to tablet growth as being the foundation for the next phase of mobile
investment by banks and credit unions. With growth of this device category far
surpassing that of smartphones, financial institutions are currently behind the
eight ball, lagging in both offerings and functionality. In fact, some mid-tier
banks still do not offer a customized tablet application for tablets, deferring
to a reconstructed mobile or web application.

According
to David Peterson, executive vice president for Q2 in Austin, TX and a report contributor, “The key for
financial institution executives is to understand and leverage the tablet, smartphone
and other devices that customers use, and present them with the right
capabilities for the right device.”

Perhaps
reflected in the increased technology investment by mid-tier financial
institutions, many community banks have lagged their larger counterparts and
credit unions in mobile banking offerings. With mobile banking becoming the primary way
many consumers interact with their bank on a transactional basis, hesitation to
respond to consumer behavioral trends could have a significant impact on customer acquisition growth
in the future.

Compliance and Security

Compliance
and security costs continue to put a strain on financial institutions of all
sizes according to the study. Beyond the extensive investment in human resources required to keep
abreast of requirements, data management tools are being used to comply with
new regulations and to monitor all areas of the organization for potential
security breaches.

Some
institutions are adjusting to the new regulatory reality, however, with some
costs seemingly being reduced over time. According to report contributor Jimmy Sawyers
from Sawyers & Jacobs, LLC, “Some institutions are getting innovative
(around the cost of compliance). They are starting to do more with less and adapting to
the new playing field.”

Unfortunately,
the same can’t be said for security costs, which are increasing and a very high
priority for all institutions given the growing threat from a highly creative
fraud community. All is not bad news on the security front, however, since
the report indicates a direct correlation between superior security and loyalty according
to Javelin Research. In other words, the investment in security may have a consumer payback.

Payments Technology

While the
majority of the focus around payments technology is on mobile, financial
institutions are also looking to improve online payments, ACH, P2P and are
spending funds to develop prepaid offerings according to this year’s report.

“The
challenge banks have is in trying to better understand how people will transact
in the future”, said David Wilkes, CEO of Fuze Networks and one of the report’s
contributors. “The reality is that there is really no such thing as an
‘unbanked’ consumer.” While some may interact with their financial provider in
a non-traditional manner, there is some form of payments system supporting
virtually every consumer.

While many
theories of how the payments marketplace will finally settle exist, the
competition (and the need to keep up with new entrants and innovation from
traditional players) will require significant investment to support the
payments process.

“Payments
will continue to evolve.” says John Balose from ORCC. “Fifteen years ago, few
people were using online payments. Mobile solutions have changed everything.
It’s a very fractured market.” According to the report, there are nearly 50
digital wallet providers currently, with more expecting to emerge.

It is clear
from the report that financial organizations may want to opt for playing a game
of ‘payments roulette’, placing smaller bets on a variety of potential
outcomes, hoping to hit the jackpot when the competitive dust settles. One
thing is clear, however. Financial institutions should not sit on the sideline
and wait for a winner. By then it may be too late.

Additional Insights

Beyond the
insights collected for the development of this year’s ‘Bankers as Buyers’
report, Williams Mills provides four feature articles from some of the best
minds in the FI space. The titles of these must-read articles and are included in the
free download:

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